The lot of an equity analyst is not always an easy one. Keep things simple or sit on the fence and your output is branded worthless – sometimes by your own boss. Run with a sceptical pack and risk being branded ‘stupid’ when exposed by a takeover bid. But stick your neck out, and suddenly you’re a spiv.
Goldman Sachs last year moved to prod the natural diplomats in its research team into making bolder calls, by banning the euphemistic “outperform” and “underperform” recommendations from its rating system. Instead, the bank said it would now insist on “buy” or “sell” tips, along with a price target for all the companies covered.
The return to a rating system that calls a spade a spade put Goldman back in line with rival Merrill, but out of whack with most other houses that use the outperform/underperform or overweight/underweight terminology.
UBS though is now making a change, saying on Monday that henceforth “reduce” would be replaced by what it actually means – “sell” – putting the bank in the straight-forward buy/neutral/sell camp.
But the Swiss bank has also given its stock pickers the ability to assign a company a short-term rating in addition to the 12-month outlook.
The short-term badge, which has a time horizon of three months, will be used where there is scope for either positive or negative short-term gyrations in a stock price that do not affect the fundamental 12-month investment case. While the main rating is set relative to specific return hurdles, the shorter term tip will just indicate the direction in which a company’s share price is expected to move.
The new rating will be used sparingly, say UBS, and there have as yet been no short-term buy or sell recommendations issued. A short-term call could be used to reinforce, or to go against, the main recommendation on a stock.
UBS cites as examples a case where a temporary operational problem or product announcement might prompt short-term moves in a share price – but where the 12-month outlook is unchanged.
Useful also, we’d suggest, for closing off the tricky question of bid speculation, enabling an analyst to maintain a sceptical take on a business’ prospects while allowing that some gung-ho private equity type might be running the numbers on an offer.
All this is done in the name of transparency, of course. But also reflects the banks’ attempts to adapt to what UBS calls their “clients’ evolving needs.”
FT Alphaville wonders if their ‘evolving clients’ needs’ might be a more appropriate description. Hedge funds account for a large and growing proportion of daily trading commissions. A shorter term outlook, and the chance for analysts essentially to flag up what they see as opportunities to short a stock seems tailor made for them.